Mumbai, July 7: The gold price crash in the international market has triggered a substantial dip in the Reserve Bank of India's exchange fluctuation reserve (EFR). The Indian central bank is set to register a dip in the EFR in its 1996-97 (July-June) balance sheet following the slump in yellow metal prices.

"Taken into account the recent fall in international gold prices, the erosion in the Reserve Bank's exchange fluctuation reserve will be to the tune of over Rs 1,000 crore. This is significant as the Reserve Bank had already booked a loss of over Rs 2,100 crore on account of the exchange risk on the entire corpus of $2.1-billion India Development Bonds in January-February this year," one senior RBI executive said. That apart, the central bank will also have to bear the exchange risk on the FCNR(A) scheme. which will be discountinued effective August 15.

The Reserve Bank books gains/losses on valuation of foreign currency and gold in a separate account called EFR - and not in its profit and loss account. During 1995-96, there was an addition of Rs 4,438.27 crore in the account taking its balance from Rs 7,538.15 crore as on June 30, 1995, to Rs 11,976.42 crore in June, 1996.

The central bank uses part of the exchange fluctuation reserve to meet the exchange losses on accrual basis in respect of liabilities under those schemes, where it provides the exchange guarantee. This is done through transferring the amount to an exchange equalisation account (EEA).

EFR can come under pressure if there is an appreciation in rupee vis-a-vis major currencies or a fall in the price of gold. A one per cent appreciation of the rupee against the US dollar will result in a draw down of the EFR by Rs 600 crore, while a one per cent fall in gold prices leads to erosion of EFR by Rs 175 crore.

Gold prices slumped to a 12-year low to $325 an ounce last week in the international market. The Reserve Bank of Australia's announcement of the bullion sale from its reserves over the past six months triggered the downslide in the price of the yellow metal. The sudden development took the spot gold down to its lowest level since early December 1985. In both New York and London, prices dipped to a 12-year low. The precious metal now has shed almost $50 since January, and bullion analysts did not rule out further fall in prices.

In the European market, spot prices tumbled to $323, lowest in the last 12 years. The same trend was reflected in the Asian markets as well. Moving in the shadow of depressed world markets, gold prices are likely to fall further in the sub-continent. The crash in the international market has triggered selling among traders in India and Pakistan, Reuter said on Monday quoting dealers.

According to the news agency, in Dubai, the feeder market for Indian sub-continent demand for gold, jewellery and bullion sales improved. The main re-export trade, however, remained sluggish. On the Mumbai bullion market, standard gold fell Rs 200 per 10 grammes to Rs 4,350 in the week to Monday. "There was some panic selling in the domestic market," a leading bullion dealer said. According to him, the country's liberal import policy linked local bullion trade to world markets.

In Pakistan's main commercial city of Karachi, gold prices are likely to plunge further on low demand and in line with the depressed international trend, the agency said. On the Karachi bullion market, the gold price fell Rs 162 to Rs 4,398 per 10 grammes.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.